Eastern District of Washington Rules on Scope of Insurance Fair Conduct Act

In a published decision, the Eastern District of Washington recently decided two frequently litigated issues regarding the scope of the Insurance Fair Conduct Act (IFCA). Workland & Witherspoon, PLLC v. Evanston Ins. Co., ___ F. Supp. 3d ___, 2015 WL 6553877 (E.D. Wash. Oct. 29, 2015). Judge Rosanna Malouf Peterson first held that the statute applies to policyholders with third-party liability insurance as well as those with first-party insurance. It further held that an insured does not have a cause of action for violation of the claim-handling regulations unless an insurer denies coverage or payment of benefits. As to both issues, the District Court followed the emerging majority position.

The case arose from a professional-liability policy that Evanston issued to the Spokane law firm Workland & Witherspoon, PLLC and its attorney-employees. When the firm and one of its attorneys, Eric Sachtjen, were sued for malpractice, they tendered to Evanston, which defended under a reservation of rights. In a separate suit, Workland and Sachtjen sued Evanston under IFCA. Evanston filed a Rule 12(b)(6) motion to dismiss, and Judge Peterson granted the motion.

The court first addressed an issue that the federal courts in Washington have been grappling with: whether IFCA’s reference to “first party claimant” creates a cause of action only for those with first-party insurance, or whether policyholders with liability insurance also have a cause of action. IFCA provides that “[a]ny first party claimant to a policy” has a cause of action for unreasonable denial of a claim for coverage or payment of benefits. RCW 48.30.015(1). The statute defines “first party claimant” in part as an entity “asserting a right to payment as a covered person under an insurance policy.” RCW 48.18.015(4).

Western District Judge Marsha Pechman has ruled three times that only those with first-party insurance can state a claim under IFCA. King County v. Travelers Indem. Co., 2015 WL 1867098 (W.D. Wash. Apr. 23, 2015); Central Puget Sound Reg’l Transit Auth. v. Lexington Ins. Co., 2014 WL 5859321 (W.D. Wash. Nov. 12, 2014); Cox v. Continental Cas. Co., 2014 WL 2011238 (W.D. Wash. June 6, 2014)). In Judge Pechman’s view, “first-party claimant” means a person or entity that is entitled to an indemnity payment from an insurer. Third-party policies, by contrast, indemnify an insured for claims that others file against the insured. Thus, IFCA’s use of the term “first-party claimant” limits the statute to those with first-party policies.

Judge Peterson agreed with Judges Coughenour, Jones, and Lasnik on the statute’s reach. She reasoned that IFCA does not distinguish between first-and third-party coverage. Instead, the statute creates a cause of action for any entity “asserting a right to payment under an insurance policy.” RCW 48.30.015(4). Thus, Workland and Sachtjen, as insureds under a third-party policy, qualified as “first party claimants.” The weight of judicial opinion, at least in the federal district court, seems to favor application of IFCA to first- and third-party insureds. State courts in Washington have yet to address this issue.

Judge Peterson also held that subsection (5) of IFCA does not create an implied cause of action for violation of the claims-handling regulations, absent a denial of coverage or payment of benefits. 2015 WL 6553877, at *4. The court observed that subsection (1) of the statute expressly created a cause of action for denial of coverage or payment of benefits. If the legislature had intended to create a cause of action for violation of the claims-handling regulations, it would have used similar language in subsection (5). By declining to do so, the legislature expressed an intent not to create a cause of action under that subsection. Id. at *7.

Judge Peterson’s decision is in accord with that of all or nearly all judges in the Western District. See Seaway Props., LLC v. FFIC, 16 F. Supp. 3d 1240 (W.D. Wash. 2014) (Jones, J.) (holding there is no such cause of action and citing seven cases from the Western District in accord, including those from Judges Lasnik, Bryan, Martinez, Pechman, Zilly, and Robart). Within the Eastern District, however, Judge Peterson appears to be in the minority. In Merrill v. Crown Life Ins. Co., 22 F. Supp. 3d 1137, 1148 (E.D. Wash. 2014), Judge Thomas O. Rice concluded that IFCA “creates a private right of action against an insurer which (1) ‘unreasonably denie[s] a claim for coverage or payment of benefits’; and/or (2) violates one of several claims handling regulations promulgated by the Washington State Office of the Insurance Commissioner.” In a more extensive, published opinion, Judge Salvador Mendoza, Jr., held that “an independent implied cause of action exists under the IFCA for a first party claimant to bring a suit for a violation of the enumerated WAC provisions in RCW 48.30.015(5).” Langley v. GEICO Gen. Ins. Co., 89 F. Supp. 3d 1083, 2015 WL 778619 (E.D. Wash. Feb. 24, 2015).

At least for cases filed in or removed to federal court, the viability of an IFCA claim may depend on which judge is assigned to the case. Ultimately, only a decision by the Washington Supreme Court—or the legislature’s amendment of the statute—can finally resolve these issues.